Genuity Research now fretting about silence from Manulife and Great West Life

The traffic tells us you all are quite interested in real-time data when it comes to what is going on in the financial services world right now. Here’s the second instalment of the day from the financial services analyst at Genuity Capital Markets;

Since late last week and throughout the first two days of this week, we have made enquires of all the banks and insurers as to their exposure to LEH and AIG. In the case of the counterparty exposure, the banks have indicated that as both were collateral posting counterparties, the exposure as at Friday’s close was not material either because of appropriate collateral or master netting agreements. The issue is that as the LEH (and perhaps AIG) side of the trade is no longer there, the banks have to “re-hedge” the exposure. Since Friday, however, spreads have changed such that banks could experience gains and losses depending on where the banks are positioned. We would not rule out charges associated with this counterparty exposure. Royal stands out in this regard because of the bank’s larger U.S. credit trading business.

Regarding direct exposures, SLF has material exposure to LEH and certain banks have indicated that exposure is not significant or within single issuer exposure limits. We are becoming increasingly uncomfortable with MFC and GWO because these insurers have not offered any comments on their exposures since we started pressing for information last week.

Second derivative effects can also be material. In this context, we highlight BMO’s Links and Parkland exposure. Assets held by the SIVs at July 31 were $10 billion. Management indicated that 35% of the assets are the senior and subordinated debt of commercial banks, 19% are structured products such as CBOs and CLOs whose underlying assets are corporate obligations, almost 10% are assets wrapped by the monolines, 13% are RMBS, and 6% are CMBS. The important point here is that since Friday, credit spreads on virtually all of the assets underlying the SIVs have increased noticeably. In our view, this could make it much more difficult for BMO to sell assets in the SIVs without wiping out the value of the capital notes, and chewing into the value of the senior notes. While we are not clear on how this impacts BMO’s requirement to consolidate the SIVs, at a minimum, we view the risks to BMO as being materially elevated.

MRM
(disclosure – I own BMO)